Exercise 1 Nane 1. Please choose the quotat ion shich is (are) direct quotat ion

Question

Exercise 1 Nane 1. Please choose the quotat ion shich is (are) direct quotat ions) A In Germany $1- 1.4567 C In US UDI -0. 8602 D In Prance1-$1.1752 2. Assune you are an American exporter and expect to receive 50 pounds sterling at the eed of ? days. You can renove the risk of loss due to a devaluat ion of the pound sterling by: A Selling sterling in the forward market for 60-day delivery B Baying sterl ing nos and selling it at the end of 60 days C Selling the dollar equivalent in the forwardsrket for 60-day delivery D Keeping the sterling in Britain after it is delivered to you 3. Asajor difference between the spot Bilrket and the forvard market is that the spot mirket deals with: A The innediate del ivery of currencies B The merchandise trade account C Currencies traded for future del ivery D Bedging of intenat ional currency risks Suppose the exchange rate bet ween the Japanese yen and the U.S. dol lar is 100 yen per dollar. A Japanese stereo with a price of 60,000 yen vill 560 B $600 $6,000D None of the above 5. In the interbank market for foreim exchange, the to the price that a bank is willing to pay for a unit of foreign currescy A Offer rate BBid rateCSpread rate D Transaction rate refers 6. In the interbank market for foreign exchange, the to the difference between the offer rate and the bid rate Cross rate BOpt ionCArbi trageD Spread refers 7. If the price of a Mini Cooper is 12, 000 in France and spot exchange rate is E1- 1.4002, then (1) According to PPP·hat should the price of a Mini Cooper in the UK be? (2) If instead the Mini Cooper is sold for £9 500 in the UK shaty happen? (3) If HM Customs and Excise of the UK levies an iport duty of 20% on inufactured goods, does arbitrage stll exist?

Explanation / Answer

1. Please choose the quotation which is direct quotation

Ans.c) In US AUD1 = $0.8602

Direct Quotation is where the foreign currency is written in fixed quantity as against the variable amount of domestic currency.

2. Assume you are an American Exporter and expect to receive 50 pounds sterling at the end of 60 days. You can remove the risk of loss due to a devaluation of the pound sterling by :

Ans a) Selling Sterling in the forward market for 60-day delivery.

Hedging is a way of removing the risk due to devaluation of the currency. Selling Sterling in the forward market and getting the payment at the current rate is a way of hedging.

3.A major difference between the spot market and the forward market is that the spot market deals with :

Ans A) The immediate delivery of currencies

Spot market deals with immediate delivery of currencies and the forward market deals with future delivery of the currency at the current rate.

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